A young man with a wad of notes and coupons announced that he was giving away prizes. All coupons will ensure atleast a return of investment and people can win jackpots too.

A man ventured his Rs 50 and immediately got Rs 100 in return. Then another guy got Rs 100 for his 50.

Then the floodgates opened. A guy got Rs 150 for his 50. And the stakes continued to rise.

Suddenly there was a frenzy. In the melee that ensued, the guy sitting next to me joined the melee with Rs 500/-. He came back clutching a handful of “gold rings”.

And the guy with the midas touch had vanished.

I could see the greed writ large on my co-passenger’s face. And later, the wry smile of a loser. !

Obviously the Midas guy had friends planted as passengers. He worked up greed and vanished with a few thousands in a few minutes.

And even though it was obvious that it was a con game, people got sucked into it.

That’s how the sharks operate the stock exchange too. No?

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“Why is the value Rs 47000 now when the markets have gone up to 14000+?”, he asked me.

“Well, only 30-35000 would have been invested in the markets. Rest goes to the advisors and other costs. So your fund has performed well. Only you were not told about the costs”, I replied politely.

I did not tell him that even though he is a CEO, he’s still a moron when it comes to investing.

Infact, he’s lucky that the fund value is Rs.47000. It could easily be 25-30000 only, if the markets were not rallying so well in the recent past!

With the costs involved, ULIPs are indeed daylight robbery.

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good morning sir!
i am located in vijayawada,andhra pradesh.it is a busy railway junction connecting north to southern states.very fertile lands and our neighbour town GUNTUR is well known for its tobaco leaf.

i work for aviva,hdfc and birla sunlife insurance as a agent for last five years.our innocent customers lost their money in ulips.i was very very innocent when joined, blindly beleived what my employers said.

today all those regular pay roll bosses jumped from one company to another like forest monkeys with pay rise, and dis appeared finally.

i failed to understand the hidden charges which are deducted on MONTHLY basis from the UNIT ACCOUNT.eventhough the NAV is highly appreciated the fund value becomes very very less due to lower number of units.

irda failed to promote simple term plans and giving timely advice to ordinary indian innocent citizens.
recently all pvt. life companies came with very attractive guaranteed polices on maturity.

But i want to confess before this board that very huge incentives and very very easy money we all make in this bussiness.very few people know how policyholders money is spent.
thanks

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Click to enlarge

The image is my desktop background.  It’s from BusinessBalls

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The basic difference between debt and equity would be the ownership level. Let’s take an example where you invest in me.

If you give out some money to me and expect that I return the money along with interest that I pre promise, that would be a debt investment. I’m indebted to you but since I have promised you a return with interest, you don’t actually own me.

In another case, you give me money at your own risk. But you trust me/hope that I’ll be a billionaire in the future and I’ll payback from my profits. The more profits I make, the more you do. If I am bankrupt, you don’t get anything back.  And so you have invested in my equity. By trusting me, you own me in a way!

In other words, by investing in a debt instrument such as a bond, you are guaranteed the principal of the bond, plus any interest that is owing.

However, for equity investors, you become an owner. As such, you also take on the risk of the company not being a success. Just as a small business owner has no guarantee of success with each new venture, neither is a shareholder.  As a shareholder, if the company is successful, you stand to make a lot of money. On the flipside, you stand to lose a lot of money if the company is less than successful.

Now debt and equity is just a classification of financial products and not a product by itself. So let me share the products available within the two classifications:

Equity: You can own any stock on the Stock Exchanges and you have invested in an equity product. If you invest through Mutual Funds who have schemes for equity. Even ULIPs invest in equity and so part of your Insurance buy goes to equity. The NPS also invests in equity.

 Shares come in different sizes and categories. There are large, mid and small caps and there are penny stocks. As a beginner, you can invest in large and mid cap companies and only after you gain experience, you can consider investing a small portion in small caps and hot penny stocks. These are the riskiest but if handled adroitly, give the largest returns. However, it needs expertise and nerves of steel.

Debt: Mutual Funds also have debt funds where you can invest. Some people may find investing in bonds simpler than investing in stocks. Your friendly neighbourhood financial advisor can provide you with government bonds like NSC/KVP. Your banker provides you with Fixed Deposits and PPF accounts. You can also pick up some highly rated corporate bonds.

Then there are hybrid funds where the Mutual Funds invest a part in equity and a part in debt.

To compare debt and equity, you need to consider the risk and the reward tradeoff. But that I guess would be another post.

Would you like to add your thoughts on this? Welcome and Thanks.

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The previous posts were theory, this is practical, the tangible part. Understanding a few things about asset allocation doesn’t really help. It helps only when you are able to apply that understanding. So what are the take aways from this knowledge of asset allocation? Let’s take it in steps.

Step 1: Understand Yourself

There’s always a risk-return trade off.  You must know whether you can absorb the shocks of short term losses when you aim at higher returns. It’s not possible that you want attractive returns and you are not exposed to a few shocks here and there. So be aware of your risk profile to start with. The three broad categories of risk profile are: Aggressive, Moderate and Conservative. Which one is your risk profile?

Step 2: Understand the Asset Classes

Sumi ( comment to my previous post) says that “we must invest in assets we understand. Blindly investing in any of them could be disastrous especially equity”. That’s so true. So one should know what options are available under equity & debt assets and then take a reality check on our comfort level with them. I’ll share my thoughts on Debt and Equity Asset classes in a future post. But let me share the link to some of the options available 

Step 3: Decide your allocation ratio

Now you knew the thumb rule that if your age is X, invest X% in debt and 100-X% in equity. Example, if you are a 25 year old guy, invest 25% in debt and 75% in equity. But after going through steps 1 & 2, it’s time you set a allocation ratio for yourself. Remember it’s personal, personal finance.

Step 4: Balance the Portfolio

We need to monitor the portfolio and rebalance it to the original allocation ratio. Why? Well, once you have invested (for example) Rs 1,00,000 , Rs 50,000 in equity and Rs 50,000 in debt funds the portfolio will change it’s ratio over time. In a few months, the equity portfolio may be valued at Rs 75,000 and debt portfolio at Rs 55,000 , total Rs 1,30,000. (just an example). So if you want to maintain your asset allocation ratio of 50% each, you may have to sell Rs10000 from your equity and invest the same in debt to make them valued at Rs 65,000 each.

By maintaining this asset allocation ratio, you are booking profits when the equity markets rise. Similarly, you are buying more equity when the stocks go down. This is what many experts do. So, by just maintaining your asset allocation ratio, you have become an expert!!

So there, I have made you into an expert. But despite this, there are people who after listening to all this, look at me with a befuddled look and say, “Now what should I do?”

I take a deep breath before I say, “Go to Hell”. “See, this is what I have done for myself. You can try that for yourself. But remember to do the step 1 & 4 for sure. And there’s the disclaimer…..”

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Marriage is a committment towards family and your social future. So is Asset Allocation. Towards your financial future.

Marriage can be an arranged one or a love marriage. (Even if you talk of a live in relationship, that’s a committment too)  Similarly your asset allocation can be done in a number of ways.

In an arranged marriage, the parents try to match the kundalis. When it comes to asset allocation your risk profile is your kundali.

In a love marriage, you are focused on the one guy/girl you love. With asset allocation also, one may stick to one asset class like equity or debt only.  For example, people who are into stocks scoff at the idea of investing in debt and people who are invested in debt may be scared of wading into stocks. They love their own asset class.

It’s a good idea to stick to the asset class you love and understand. The only problem is that of lack of diversification. Though you can diversify within your stock portfolio or spread risk over within your debt portfolio.

In any case, you need to work on your marriage even though they may be made in Heaven. So do you need to continuosly evaluate your asset allocation and do course corrections.

Do stay tuned in for concluding thoughts on Asset Allocation. It’s Part 3

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Most times, people are interested in getting a quick fix answer. But I always prod them to see the “big picture”. This “big picture” is your asset allocation. Simple.

Let’s begin with a few snapshot data. In 2000, the Sensex gave you a -26.1% return, Gold -3.33% while Debt Funds gave a +10.19% growth. But in 2006, it was  +46.7 for Sensex, +5.28% for Debts and 35.0% for Gold.

And nobody knows for sure what 2009 or 2014 or 2020 will give returns on the three asset class. If the papers tell you that Debt funds are doing well and you take out your equity investments and put them into Debt, chances are that the equity is back to performing well and the debt funds nosedive.

If nobody knows when and what returns will an asset class give, jumping from one asset class to the other is really a bad idea. Agree? Good, now I can tell you to go read all about Asset Allocation (Wikipedia). A few excerpts:

Asset allocation is based on the idea that in different years a different asset is the best-performing one. It is difficult to predict which asset will perform best in a given year. Thus, although it is psychically appealing to try to predict the “best” asset, proponents of asset allocation consider it risky. They say that someone who “jumps” from the one asset to another, according to whim, may easily end up with worse results than any consistent plan.

Academic studies have pointed out that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the study lumped together as “market timing”.

To start off, the thumb rule of asset allocation is based on your age. So if your age is X, invest X% in debt and 100-X% in equity. If you are a 25 year old guy, invest 25% in debt and 75% in equity. Always remember, it’s just the thumb rule.

In real day to day life, Asset Allocation can be related to getting a wife/husband for yourself. You need to give a serious thought when you are getting married. Not to someone your friend likes and approves, but someone you care for yourself!!

And once you get married, you can’t have a profile saying, “Married, Still Looking”.

The process of divorce is costly and painful and so is changing your asset allocation decision.

And if you are happily married, there’s so much joy in having happy children playing around. Stay invested with your asset allocation decision, and money makes more money.

Stay tuned for more updates. Part 2, Part 3

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While I keep learning from the above personal finance blogs, there are a few Indian values that can add to the financial awareness of the US citizens. The United States and India are working together to synergize their strengths across sectors such as nuclear energy, aerospace, defense, and biotechnology.

What about the area of personal finance?

The purpose of this post is to share the different financial habits of an American and an Indian. Learning starts once you are aware.

When it comes to personal finance, it’s generally about income and expenses, savings and investments. Let’s look at some of the areas where Indian and US citizens are as different as chalk and coal. Income disparities don’t really matter on the aggregate level. For example, if a US guy earns many times more than an Indian, he also spends many times more on his haircut. There’s something called purchasing power parity and so let’s forget about income for a while.

Let’s get down to three elements of personal finance: Savings, Expenses and Investment.

Savings

Indians are compulsive savers. The Gross Domestic Savings of Indians is 34.8% of GDP. But in the US, if you take a survey on savings habit, asking how much you save is asking for trouble. The respondents will give you a fuddled look. It’s better to ask whether you save or not. That’s what the Federal Reserve Survey did.

The Federal Reserve survey says that in 2007, 6.0 percent of US families reported that their spending usually exceeds their income; 16.1 percent reported that the two are usually about the same; 35.7 percent reported that they typically save income “left over” at the end of the year, income of one family member, or unusual additional income; and 42.2 percent reported that they save regularly.

In 2007, the most frequently reported motive was retirement related (33.9 percent of families), and the next most frequently reported was liquidity related (32.0 percent of families), a response that is generally taken to be indicative of saving for precautionary reasons. At least since 1998, these have been the dominant reported reasons, but saving for retirement has increased in importance. Source:

Federal Reserve Survey of Consumer Finances

Expenses

We Indians don’t really understand how you can spend more than what you earn. But for an American, he’s born with those genetic abilities. If you are spending more than you earn, you are not just not saving, you are also getting into a debt trap. Looks like that an American is adept in getting into a debt trap!!

Investments

In India the saving is invested very conservatively. It’s primarily in low risk Bank Fixed deposits which take a lion share of 56.5%. Stocks, Debentures and Mutual Funds take away only 10.5 %. Indians have put more money on Insurance (17.6%) than stocks, Mutual Funds combined and they take Insurance as an investment option. The savings allocated to various financial assets is as under: (RBI Data)

Looks like that the US citizens are primarily interested in taking precaution for their retirement life and the lion share of their investment goes to retirement accounts. As we can see from the table below that the US citizen has much more options to choose from. But getting a wider choice is adding to the information overload, I think.

So what can an Indian and an American learn from each other?

Every time I come to the point of preaching something, I remember my favorite quote: “I want to learn. But I don’t want to be taught”. But you can teach yourself for sure.
So the starting point of learning something from each other would be to become aware of each other strengths and weaknesses.

Not to take on each other weaknesses. Like we see increasing number of Indians getting into credit card debts and making huge financial mistakes. But to learn from the other’s strengths.

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Money smiled and said, “Of course, I am. But I have yet to see the face of a dustbin”

It’s an sms that my son received from his friend. No source known. But interesting one, no?

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